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SA continues to turn blind eye to tax fraud and corruption

Following last week’s budget presentation in which Finance Minister Nhlanhla Nene indicated a projected R979 billion in tax revenue for the 2014/15 financial year, approximately R14.7 billion less than the budget estimate a year ago, together with the dismal anticipated 8.2% increase in consolidated budget revenue, Vusmuzi Masilela, Forensics Director and Specialist Forensic Accounting Leader at SizweNtsalubaGobodo, believes that this is indicative of a glaring structural gap that could, in all likelihood, be addressed through implementing appropriate measures to clamp down on tax fraud.

"As mentioned by the Finance Minister, even after lowering our expenditure ceiling, and taking into account the need for sustainability in managing our debt, there is still a structural gap between our spending needs and the amount of tax we expect to collect.

"However, more worrying is the fact that this is in addition to the existing tax gap in the form of tax liabilities not collected. With the South African Revenue Service (SARS) estimating the tax gap to be between 15% and 30% of overall tax revenues, the additional structural gap is only serving to further exacerbate the problem,” he explains.

With tax revenues expected to be around R1 trillion this year, Masilela says this could mean as much as R300 billion in additional collections, which he believes would be more than enough to plug the R140 billion budget deficit.

"What this effectively means is that by closing the tax gap, South Africa could potentially reap billions of Rands to the benefit of the economy. Here, I am therefore inclined to echo the sentiments of French Finance Minister, Michel Sapin, and rather than raise taxes, I would prefer to combat tax fraud,” he adds.

For Masilela, tax fraud and corruption remain a fundamental barrier to effective and fair taxation and are significant contributors to our tax gap. In this regard, he lists the main tax fraud, corruption and other tax irregularities that contribute towards the tax gap as:

  • Understatement or non-declaration of income by tax payers. For example, complete tax evasion, reduction of tax liability or dishonestly qualifying as a small business.
  • Understatement or non-declaration of goods or value of goods brought into the country in order to avoid paying the relevant duties or reduce the tax liability.
  • Profit shifting, trade mispricing, irregular payments from parent companies and subsidiaries, and transfer pricing mechanisms designed to hide revenues.
  • Highly complex and unreasonably convoluted business structures and transactions designed to evade tax.
  • Charging and collecting VAT while not registered as a VAT vendor or not registered as a VAT vendor in spite of meeting the threshold for compulsory VAT registration.
  • Bribery in the form of illegal payments to tax/custom officials to reduce tax or to be granted tax exemptions, clearances, etc.

However, Masilela emphasises that the fight against tax fraud and corruption is not the responsibility of government and SARS alone. "For us to succeed in addressing these issues and curb tax fraud and corruption, the business sector and civil society at large need to closely work with government and tax authorities.”

"The discussion around tax fraud and corruption should, in my view, feature high up on the agenda alongside tender or supply chain management fraud and corruption. However, first and foremost, understanding the main drivers of tax fraud and corruption in tax administration is essential to determining the approach that is required to effectively tackle this ongoing issue,” he concludes.